Detroit bankruptcy judge OKs $85M deal to end swaps

U.S. Bankruptcy Court Judge Steven Rhodes confirmed an $85 million settlement ending interest-rate swaps that have cost Detroit taxpayers more than $200 million since 2009 — but took a moment to remind attorneys in the city’s sprawling Chapter 9 bankruptcy case that he is the decision-maker in the proceedings.

“It is apparent that (some) parties are engaging in an orchestrated public relations campaign …,” Rhodes said following his swaps ruling about recent developments in and out of court in the city’s $18 billion bankruptcy.

Creditors, he said, must “give serious consideration to whether this is really in their best interests, or if it is ultimately counterproductive to the (process of) reaching a resolution in this case.”

The settlement, a 70 percent reduction in the amount the city was liable for under a 2009 agreement that also tied casino revenue as collateral to the swaps, yields a payout of $42.5 million apiece to UBS AG and Bank of America Corp.’s Merrill Lynch unit to terminate the swaps. Detroit already has set aside $8.4 million toward that sum and would pay an additional $4.2 million a month until late 2015 to satisfy the balance and will keep its casino revenue under the new deal.

Rhodes had previously rejected settlement deals for $220 million and $165 million to terminate those swaps.

Rhodes reviewed and denied the various objections from creditors, including Syncora Guarantee Inc., which insures some of Detroit’s debt.

It was not immediately clear whom Rhodes was targeting in his remarks, though earlier this week a group of creditors led by Financial Guaranty Insurance Co. submitted a motion stating it had lined up four tentative bids of as high as $2 billion to purchase all or parts of the Detroit Institute of Arts collection. Syncora and American Federation of State, City and Municipal Employees Council 25 also supported that motion.

The judge took issue in court with the notion that approving the settlement gives the city unfair leverage or a tacit approval to part of Detroit’s proposed plan of adjustment to settle debts with its creditors — as the approval now gives Detroit the consent of one voting class of creditors.

The swaps settlement includes a provision for UBS and Merrill Lynch to vote their impaired Detroit claims in favor of the city’s adjustment plan.

But Rhodes, in his ruling, referenced a separate settlement earlier this week in mediation for bond insurers Ambac Assurance Corp., National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp. to pay more than $100 million on unlimited tax general obligation bonds, as a sign Detroit already had a consenting creditor class.

The city, in mediation talks, agreed to pay $287.5 million, or 74 percent, on an allowed aggregate claim of $388 million on its unlimited tax general obligation bonds, with the three insurers paying the balance.

“The message is that now is the time to negotiate. Not on the eve of the confirmation hearing in July, or even in June or May, but now,” Rhodes said.

Detroit is set to seek court permission later this month to organize a creditor vote on its debt adjustment plan.